With the Asian crisis receding, the world is beginning to shift gears—absorbing the lessons of a volatile decade and taking up again the task of creating a more stable world economy. The U.S.-based Bretton Woods Committee used its annual meeting on June 9 to assess the daunting challenges facing the Bretton Woods institutions and the world economy as the new millennium approaches. Members of the committee heard from prominent U.S. congressional leaders and Dwayne Andreas of Archer Daniels Midland Company; from the heads of the IMF, the World Bank, and the International Finance Corporation, and from Robert Rubin, outgoing U.S. Secretary of the Treasury, who delivered the keynote address. The meeting also featured a panel discussion on the merits of IMF financing from private markets.
IMF Managing Director Michel Camdessus underscored how much the future stability of the world economy would depend on developing mature relationships between borrowers and lenders and on the ability of all participants to lay the basis for successful crisis resolution before crises strike.
The question of the IMF’s obligations in this new world of international finance was also at the heart of the panel discussion on how best to meet the general resource needs of the IMF in the future. While Adam Lerrick contended the IMF should tap private markets, Jessica Einhorn raised several serious concerns, among them fears of unacceptable conflicts of interests for the IMF in a period when it is increasingly called upon to assume a growing role in regulating private international finance, particularly in crisis situations.
It was clear, Rubin said in his keynote address, that nothing should be taken for granted. As the 1990s have vividly demonstrated, the global economy can provide considerable risks as well as extraordinary opportunities. The Bretton Woods organizations must adapt to meet globalization’s challenges, but, more broadly, supporters of a market-based international economy and an open trading system must make certain the benefits of an integrated global economy are widely shared and better understood, so that its goals continue to draw political support.
World Bank and IFC look ahead...
Press preoccupation during the Asian crisis with financial packages, exchange rates, economics, and statistics “made us humble,” World Bank President James Wolfensohn said. The experience prompted the Bank to reorder its priorities and increasingly shift its focus to structural issues, so that it could address, among other things, the need to confront corruption and promote good governance; to ensure viable legal and judicial systems to allow private sectors to thrive; to develop effective supervisory and regulatory agencies for financial systems; and to help design social safety nets for economies in crisis and in transition. The Bank will not be able to do all this on its own, Wolfensohn acknowledged, and there will be much more coordinated work with the international financial institutions, the nongovernmental organizations (NGOs), civil society, and the private sector. These are not the types of measures to grab headlines, but the Bank’s new focus on structure is the correct one, he believed.
Peter Woicke, who became Executive Vice President of the International Finance Corporation (IFC) and Managing Director of Private Sector Operations for the World Bank Group on January 1, 1999, addressed a luncheon gathering of committee members. He sketched for them his plans for the organization in the coming years, focusing on the work of the World Bank Group and private sector development.
IMF and “bailing in” the private sector
If any characteristic distinguishes this decade’s economic crises, Camdessus observed, it has been the prominent role played by private sector creditors and debtors. As the Mexican and Asian crises pointedly confirm, market players, regulators, and policymakers failed to fully grasp the risks that accompanied the decade’s considerable opportunities.
While the search is still on for the causes and cures of these crises, the principle underlying any remedy must be, Camdessus said, the “need to foster a mature market” based on stable relationships among participants. Official involvement should be limited, he said, “to establishing strong legal, regulatory, and supervisory frameworks,” and the value of good governance, transparency, and cooperation should be apparent to all.
But what specifically, Camdessus asked, could debtors, creditors, and the IMF do? For debtors, he noted that honoring contracts is the foundation on which mature markets are built. But to this basic step must be added macroeconomic stability and growth, a workable bankruptcy law and an independent judicial system, adherence to international standards of disclosure and governance, development of a robust regulatory and supervisory framework for the financial sector, and promotion of sound debt management and frequent monitoring of private external liabilities.
For creditors, risk assessment and risk management are the chief concerns, but creditors should also encourage adherence to international standards and be willing to support adaptations of regulatory and supervisory standards in their own countries, according to Camdessus. Private creditors can also help preserve foreign exchange liquidity by providing contingent financing when crises loom. Good communication between creditors and debtors will, of course, be an essential ingredient in any mature relationship.
The IMF’s traditional activities—notably, bilateral and multilateral surveillance—offer the first line of its defense of a stable international economy. But a recent IMF innovation—the creation of Contingent Credit Lines—now also allows it to offer financial resources to bolster those crisis prevention efforts.
But, as Camdessus acknowledged, crises will happen, and a “delicate balance” must be maintained among the objectives of preserving countries’ market access in normal times, ensuring equitable treatment of creditors if a crisis strikes, and avoiding debtor and creditor moral hazard through market-based and market-friendly solutions. Where new financing is not available and comprehensive debt restructuring is needed, he argued that bondholders should not expect public funds from the international community to shield them. In some extreme cases, he said, countries may have no orderly way out of the crisis without a comprehensive debt restructuring that includes bonds. Where default cannot be avoided, it will be critical to maintain proper working relations and avoid having good faith negotiations stymied by a handful of dissident creditors. One option—admittedly a controversial one, he said—would be to require a new interpretation or amendment of the IMF’s Articles of Agreement to allow the IMF to declare a stay on legal actions of creditors during such negotiations. But if all concerned take the necessary steps to develop a mature relationship, these extreme cases would be rare and the framework would be in place to deal with them, according to Camdessus.
Should the IMF use private financing?
Private Sector Financing for the IMF: Now Part of the Optimal Funding Mix, a study published by the Bretton Woods Committee, provided the basis for a panel discussion among Adam Lerrick, author of the study and head of an advisory firm focused on funding strategies and structured finance; Jessica Einhorn, a Visiting Fellow at the IMF and previously a Managing Director at the World Bank in charge of financial management and resource mobilization; and Thomas C. Dawson II, Director of Merrill Lynch’s Financial Institutions Group and incoming Director of the IMF’s External Relations Department (see page 205). They found themselves sharply divided on the key question of whether private financing was in keeping with the character and objectives of the IMF.
Lerrick presented a summary of his report’s findings, arguing that the world economy, the markets, and the nature of the IMF’s operations had all changed dramatically in recent decades and that the manner in which the IMF financed its operations should adapt accordingly. Recourse to global capital markets, he said, could augment IMF resources by $100 billion, or 50 percent. These additional resources would be available to borrowers at a cost equivalent to current subsidized rates and would provide substantial savings for the IMF’s three largest creditor countries—the United States, Germany, and Japan.
For member countries, tapping private capital would “enhance the liquidity and safety of international reserves and underwrite the exchange of zero-cost domestic currency promissory notes for excess reserve positions at the IMF.” And for the IMF, he said, tapping private capital would afford flexibility and speed in crisis financing and sidestep political factors within member countries. “The very fact of a major accessible source of alternate funding will moderate the uncertainty that leads to speculation and destabilizes markets,” he added.
Einhorn complimented Lerrick on laying out in technical detail the operational aspects of his proposal but argued that the evolution under way in financial architecture in the aftermath of the Asian crisis made market financing for the IMF unthinkable in the foreseeable future. She challenged the cost advantages to the United States of private financing and underscored that profitable investment and currency translation through swap markets—two advantages highlighted in the Lerrick study—would be available only with substantial credit exposure by the IMF to the banking system.
Her basic objections, however, were on principle and unequivocal. “Under all circumstances I can imagine,” she said, “I would prefer to see the IMF consigned to managing within its present quota base than permit a market borrowing program.” She concentrated her arguments on the public policy side, laying out why Lerrick’s proposal “was privately feasible but publicly inappropriate to the quasi sovereign status of the IMF.”
The design of the IMF—and its reliance on currencies exchanged with members in times of crisis—is critical to its whole mission, she emphasized. The proposal had the IMF holding its prudential liquidity in the banking system in times of crisis. While overall liquidity would remain unchanged by IMF actions, she expressed concern that the IMF would find itself intimately involved in banking exchanges when it should be mediating those calls through major shareholders and their central banks.
She also pointed out that the moral hazard concern—one of the chief criticisms leveled at the IMF—would be exacerbated if the IMF were to have ready access to private money and if private financiers funded both the IMF and the developing countries—and profited from the spreads as well.
Dawson, also underscoring public policy concerns, noted that while he did see some potential scope for private financing of the IMF’s Contingent Credit Lines, he believed the Lerrick report overstated the benefits of private financing and understated the real problems, notably that the IMF really is “something like a central bank” and does have regulatory responsibilities that are likely to grow. He feared the report was unduly preoccupied with U.S. funding problems. The political difficulties that accompany the quota exercise in the United States are not a problem elsewhere, he said.
Opportunities and risks
In a closing address to the Bretton Woods Committee and in what he referred to as one of his last speeches as U.S. Treasury Secretary, Rubin reminded his audience of the tremendous opportunities afforded by the global economy and of the considerable risks that accompanied this process. Recent turmoil in world markets has intensified debate over whether nations should retreat from global integration and market-based economics.
While Rubin had unquestioned faith in the benefits of both, he cautioned supporters of a market-based global economy to heed the anxieties being expressed and the possible erosion of support for global integration and market-based economics. Creating “the conditions in which free flows of capital and market-based economies work best” will entail a number of steps:
• Strengthening and reforming the international financial institutions. These institutions have played a critical role in confronting the global financial crisis and have recognized the need to improve their operations and broaden the scope of their concerns. Increasingly, he added, they are more open and promote private sector development; focus on environmental, health, education, labor, human rights, and women’s issues; acknowledge the key obstacle that corruption represents; and seek new means to deal with financial crises.
• Reforming, in a comprehensive manner, the architecture of the international financial system. This encompasses promoting the adoption of international standards and best practices among developing countries and encouraging better risk management in industrial country financial institutions.
• Continuing to press for an open trading system. Rubin expressed deep concern about the recent passage, by the U.S. House of Representatives, of a bill imposing quotas on steel imports. This legislation, “inconsistent with World Trade Organization standards and antithetical to open, market-based economic growth,” creates a “real risk of strengthening the already increased protectionist pressure being felt around the world,” he said. But those who support free trade also need to recognize that an open trade policy must be complemented by a “forward-looking domestic policy” that gives people the tools to succeed in a global economy and enables those dislocated by the global economy to reenter that economy as quickly as possible.
Rubin also emphasized that the politics of international economic policy were as important as the policy. “We must focus,” he said, “on working to broadly share the benefits of growth and globalization, including through bilateral and multilateral aid; targeting resources to the most vulnerable; and offering debt relief to the poorest nations that are committed to reform.” These measures, he added, are not just good economic policy, they are key to building support for that policy.
Ian S. McDonald
Senior Editorial Assistant
The IMF Survey (ISSN 0047-083X) is published in English, French, and Spanish by the IMF 23 times a year, plus an annual Supplement on the IMF and an annual index. Opinions and materials in the IMF Survey do not necessarily reflect official views of the IMF. Any maps used are for the convenience of readers, based on National Geographic’s Atlas of the World, Sixth Edition; the denominations used and the boundaries shown do not imply any judgment by the IMF on the legal status of any territory or any endorsement or acceptance of such boundaries. Material from the IMF Survey may be reprinted, with due credit given. Address editorial correspondence to Current Publications Division, Room IS7-1100, IMF, Washington, DC 20431 U.S.A. Tel.: (202) 623-8585; or e-mail any comments to email@example.com. The IMF Survey is mailed first class in Canada, Mexico, and the United States, and by airspeed elsewhere. Private firms and individuals are charged $79.00 annually. Apply for subscriptions to Publication Services, Box XS900, IMF, Washington, DC 20431 U.S.A. Tel.: (202) 623-7430. Fax: (202) 623-7201; e-mail: firstname.lastname@example.org.